Click here to load reader

SYSTEMS OF CARBON TRADING - Touro Law Center · PDF filetrade of carbon credits, the introduction of a cost effective and simple system arguably is an essential tool to assist the

  • View
    213

  • Download
    0

Embed Size (px)

Text of SYSTEMS OF CARBON TRADING - Touro Law Center · PDF filetrade of carbon credits, the...

SYSTEMS OF CARBON TRADING

Dr. Bruno Zeller*

This Article discusses the current state of carbon trading and suggests a possible path forward. There is much commentary on the abatement of greenhouse gasses in response to the Kyoto Protocol. In essence, the Protocol suggests that a cap and trade program should be implemented by nations in order to reduce greenhouse gas-ses. This Article does not discuss the environmental aspect of the process and hence presents no views as to the policies of reducing greenhouse gasses.

This Article focuses on the last step in the process, namely the trade in carbon credits. This area of what may be termed the com-mercial aspect of cap and trade has not received the attention it de-serves. The reasonit can be termed the commercial arm of green-house abatementis that carbon credits can be traded and where there is trade there are profits to be made. However, only focusing on the profit aspect of trading overlooks the social aspect of reducing worldwide pollution as well as the need to assist polluters to cut costs in order to remain competitive and continue to reduce their green-house gasses.

The starting point is that reducing pollution comes at a cost to industry and to nations. In order to assist the necessary worldwide trade of carbon credits, the introduction of a cost effective and simple system arguably is an essential tool to assist the trade in carbon credits. Furthermore, the introduction of a uniform arbitration sys-tem ought to be part of such a discussion. This has not happened yet and many private firms have currently seen a possibility to engage in a profitable enterprise and are already trading in what may be called an unregulated market. In order to come to an understanding of how a possible trade can be regulatedprivately or by govern- * Associate Professor, Victoria University, Melbourne; Adjunct Professor, Murdoch Univer-sityPerth, School of Law; Associate Professor, The Institute for Logistics and Supply Chain Management, Victoria UniversityMelbourne.

910 TOURO LAW REVIEW [Vol. 25

mentsan understanding of the mechanism of greenhouse gas reduc-tion must be gained. This Article looks at the efforts of the leading group, namely the EU, with other examples from Australia and the United States.

The Kyoto Protocol introduced three possible trading schemes, namely a market-based flexible emission trading scheme, Joint Implementations (JI) and the Clean Development Mechanism (CDM). The market-based trading scheme focuses on markets within an economy. JI, on the other hand, takes advantage of efforts by companies wishing to expand into other countries in order to re-duce their own target as well as assisting the host country with tech-nology transfers. CDM projects are technology transfers into devel-oping countries with no Kyoto targets. It is obvious that trade will cross borders affecting not only pricing but also current Free Trade Agreements and possibly World Trade Organization (WTO) obli-gations.

The purpose of this Article is to enliven and start a discussion of possible solutions in the creation of a viable carbon trading sys-tem, which will also assist in the reduction of greenhouse gasses. The lessons of the credit crisis should not be forgottennor the ef-forts of the past thirty yearsin the creation of uniform international laws.

TABLE OF CONTENTS

INTRODUCTION .................................................................................912

I. THE POLICY LEVEL.................................................................914

A. Emissions Trading...........................................................919

B. Joint Implementation.......................................................921

C. Clean Development Mechanism .....................................922

II. THE EU POSITION ...................................................................923

III. THE PRINCIPLE OF AUCTIONING PERMITS...............................926

IV. DISCUSSION OF PROPOSED SOLUTIONS ...................................929

A. Introduction .....................................................................929

2009] SYSTEMS OF CARBON TRADING 911

B. Industry Based Solutions.................................................934

C. Allowance and Project Based MarketsIs Unification

of Trade Laws Possible? .................................................937

V. CONCLUSION...........................................................................941

912 TOURO LAW REVIEW [Vol. 25

SYSTEMS OF CARBON TRADING

INTRODUCTION

Despite the financial crisis, the topic of climate change has

never been far from headlines and many papers have devoted special

information supplements to this discussion.1 Most, if not all, of these

discussions revolve around the question of what a business or house-

hold can do to reduce the carbon footprint while simultaneously re-

ducing costs. Governments have devoted much time and energy to-

wards tackling the problem of climate change by devising policies to

cap the emissions and trade carbon credits. Indeed, the carbon mar-

ket is the most visible result of efforts of individual governments

and industries to mitigate climate change.2 The problem, however,

is that not much thought has been devoted to the actual legal frame-

work once the cap and trade is in full swing. No doubt domestic con-

tract law can always be used to resolve the trading aspect. However,

it is argued that this is not the best nor the most cost effective method

available. Lessons from the past twenty years should not be forgotten

as the general move towards international uniform laws has proven to

be advantageous.3 Indeed, this current financial crisis has demon-

1 See, e.g., A CLIMATE FOR ACTION, THE GLOBE AND MAIL 1-6 (2008),

http://www.ipac.ca/documents/Globe%20and%20Mail%20(6)1.pdf. 2 PHILIPPE AMBROSI & KARAN CAPOOR, STATE AND TRENDS OF THE CARBON MARKET 2008

1 (2008), http://wbcarbonfinance.org/docs/state_trends_final.pdf. 3 See, e.g., Ulrich G. Schroeter, Vienna Sales Convention: Applicability to Mixed Con-

tracts and Interaction with the 1968 Brussels Convention, 5 VINDOBONA J. OF INTL COM.

2009] SYSTEMS OF CARBON TRADING 913

strated that solutions based on domestic policies and laws do not sup-

ply the best solutions. Joseph Stiglitz wrote in TIME: As the global

economy becomes more interconnected, we need better global over-

sight. It is unimaginable that Americas financial market could func-

tion effectively if we had to rely on 50 separate state regulators. But

we are trying to do essentially that at the global level.4 The trade in

carbon credits, which is a global problem and hence requires a global

solution, is a prime candidate for inclusion into the uniform interna-

tional law regime. Trade must be distinguished from the problem of

capping emissions, as the latter task is a matter each country has to

tackle individually. States are beholden to their constituencies,

whether politically or economically, and hence will use their sover-

eign power to resolve this issue, hopefully within the parameters of

future conventions.

Trade, on the other hand, has successfully taken off and is

only regulated by individual agencies or private organizations such as

brokering houses. A successful international uniform framework has

not yet been devised nor seriously discussed. Another fact is obvi-

ous: a system of law dealing with carbon permits cannot be con-

structed unless major policy implications are taken into considera-

tion. The policy process and purpose of the trading scheme is the

framework and the legal model is the meat on the bone that makes

the construction work. Against this international backdrop, the Euro-

pean Union (EU), in 2005, introduced a European Trading system

L. & ARBITRATION 74 (2001).

4 Joseph Stiglitz, Nobel Laureate: How to Get Out of the Financial Crisis, TIME, Oct. 17, 2008, available at http://www.time.com/time/printout/0,8816,1851739,00.html.

914 TOURO LAW REVIEW [Vol. 25

(ETS), which was noted as being one of the most important in-

struments.5 However, it is not guaranteed other countries will adopt

the EU system and hence the view expressed in this Article, to intro-

duce an international system, has the advantage of being neutral in

nature.

This Article examines EU and Australian policy frameworks.

These two entities have signed the Kyoto Protocol. The views in re-

lation to trade issues within the United Statesthe major country that

has not yet signed the Protocol and accounts for 36.1% of world

emissionare also of interest.6 It is this Articles contention that

once the major frameworks are analyzed, a view should emerge of

what system of laws and which legal model should govern the trade

in carbon permits. This Article argues that the most cost effective so-

lution is the use of international uniform trading laws. It goes with-

out saying that having a system of trade is only one-half of the total

framework. A creation of an international dispute resolution system

completes the circle of trade.

I. THE POLICY LEVEL

The backdrop is the Kyoto Protocol adopted in 1997. The

Protocol is u